a Review Forbes The 20th edition of the Global 2000 List, made up of large public companies with a combined market capitalization of $76.7 trillion and consolidated profits of $5 trillion, showed signs that the big tech companies on the list that have adopted blockchain technology could face the expense of profitability in a growing inflationary environment.
As of the last four consecutive quarters and current market values of the 2,000 globally ranked companies in FactSet as of April 22, 2022, IT software and services stocks accounted for 10.5% of the total market capitalization of the 2,000 globally ranked companies., but only 5.6% of global profits. This is compared to the shares of major banks, which accounted for 4.3% of the total market capitalization and 9.1% of global profits.
By measuring the theoretical market capitalization that these two sectors could have based on their share of 2000 global profits, we learned that IT software stocks are overvalued by up to 88% while banking stocks are undervalued by 38%. Thus, if tech companies had acquired 5.6% of the global market capitalization in 2000 (equivalent to their share of the profits), their market capitalization would have been $4.3 trillion, not $8 trillion.
Shine wearing blockchain?
Over the past four years, Forbes It has recognized over 100 companies for their strong blockchain initiatives in what we call the Forbes Blockchain 50 List. In our evaluation exercise, the Blockchain 50 Prize serves as a proxy for a company’s tendency to adopt potentially disruptive technologies faster. Not surprisingly, the top five IT software companies by market capitalization on the Global 2000 list receive the Blockchain 50 rating: Microsoft (MSFT #15 on the Global 2000 list), Alphabet (GOOGL #13), Meta (FB, #33), and Tencent (Tencent, No. 29), and Oracle (ORCL, No. 71).
Conversely, only three of the five largest banks and diversified financial services companies have received the Forbes Blockchain 50 distinction. The majority of these companies have amazing double-digit profitability, but this was not enough to give investors a solid stock price appreciation.
The largest traditional finance company and No. 3 on this year’s Global 2000 list, Berkshire Hathaway (BRK.B, No. 3 on this year’s Global 2000 list), recently reaffirmed its opposition to digital assets — investments built using blockchain technology — during its annual investor gathering. . Meanwhile, the second largest bank JPMorgan Chase (JPM, number 2 on the list) had a love-hate relationship with cryptocurrencies but took a hands-on approach to developing blockchain projects such as ethereum-based Quorum and Onyx. But a growing number of banks of all sizes — 35 featured in a recent full-page ad for the Wall Street Journal — embraced in 2021 and 2022 the ability to offer Bitcoin investment to clients through the services of tech companies like NYDIG and Paxos.
Time to reset?
Investors tolerate tech companies’ lack of profitability for extended periods, but the valuation based on profitability may rebound and the darlings of the bull cycle create more risks than companies with solid profitability. An important secondary reason for the excessive rise of tech stocks may be related to how passive investing follows strict allocation rules that can give tech stocks a higher share than they deserve from a profitability perspective.
What about the bank gloom? Is this a buying opportunity? It is undeniable that banks’ balance sheets will be hit as non-performing loans grow from 1.6% in 2020 – reaching 7.5% in 2010 after the financial crisis. But it is also true that most banks’ balance sheets are cleaner. Today there is only a remnant of Wall Street toxicity due to stricter regulations on things like risk-based capitalization requirements. Perhaps most importantly, banks are likely to improve their financial penetration in the coming years. That is, an increase in interest rates from the Fed is likely to translate into more bank profits because it will raise lending rates faster than borrowing costs. Banks are likely to pass higher returns to depositors very gradually, and these asymmetric measures (raising interest rates immediately, passing higher rates to depositors gradually) lead to higher profitability.